A general ledger acts as a record of all of the accounts in a company and the transactions that take place in them. Balancing the ledger involves subtracting the total number of debits from the total number of credits. In order to correctly calculate credits and debits, a few rules must first be understood.
Key Takeaways
- A general ledger is a record of all of the accounts in a business and their transactions.
- Balancing a general ledger involves subtracting the total debits from the total credits.
- All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side.
- For a general ledger to be balanced, credits and debits must be equal.
- Debits increase asset, expense, and dividend accounts, while credits decrease them.
- Credits increase liability, revenue, and equity accounts, while debits decrease them.
How to Calculate the Balances
To begin, enter all debit accounts on the left side of the balance sheet and all credit accounts on the right. Include the balance for each. Consider which debit account each transaction impacts and whether it ultimately increases or decreases that account. For instance, does it decrease inventory or increase cash? Finally, calculate the balance for each account and update the balance sheet.
When you have finished, check that credits equal debits in order to ensure the books are balanced. Another way to ensure that the books are balanced is to create a trial balance. This means listing all accounts in the ledger and balances of each debit and credit. Once the balances are calculated for both the debits and the credits, the two should match. If the figures are not the same, something has been missed or miscalculated and the books are not balanced.
Important Rules to Follow
First, debits must ultimately equal credits. While this may be confusing at first, and it may be tempting to simply use positive and negative numbers to account for transactions, ultimately the debit and credit relationship more accurately expresses what happens in a business.
Second, debits increase asset, expense, and dividend accounts while credits decrease them. It may be helpful to use the mnemonic D.E.A.D. to remember this. Debits increase Expenses, Assets, and Dividends.
Third, the opposite holds true for liability, revenue, and equity accounts. Credits increase these while debits decrease them. The mnemonic for remembering this relationship is G.I.R.L.S. Accounts which cause an increase are Gains, Income, Revenues, Liabilities, and Stockholders' equity.
Because these have the opposite effect on the complementary accounts, ultimately the credits and debits equal one another and demonstrate that the accounts are balanced. Every transaction can be described using the debit/credit format, and books must be kept in balance so that every debit is matched with a corresponding credit.
Accounting Practices
Accounting software such as QuickBooks, FreshBooks, and Xero are useful for balancing books since such programs automatically mark any areas in which a corresponding credit or debit is missing. Most companies will have an in-house accountant who will handle all of this, but if you are handling your own finances it is a good idea to run important numbers through an outside accounting consultant like a certified public accountant (CPA) or enrolled agent (EA).
A debit without its corresponding credit is called a dangling debit. This may happen when a debit entry is entered on the credit side or when a company is acquired but that transaction is not recorded. Similarly, a credit ticket may be entered into the general ledger when a deposit is made, but it needs an offsetting debit ticket, either at the same time or soon after, to balance the books.
FAQs
Balancing a general ledger involves subtracting the total debits from the total credits. All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side. For a general ledger to be balanced, credits and debits must be equal.
How to calculate balance in general ledger? ›
In order to calculate your ledger balance, add all the credits (deposits, reversals, etc.) that go through your account during the day to the opening balance. Then subtract all the withdrawals, transfers, and other debits from that figure. This will give you the end of day or ledger balance.
How do you calculate debits and credits in accounting? ›
Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.
What are the rules for debit and credit in ledger? ›
Before we analyse further, we should know the three renowned brilliant principles of bookkeeping:
- Firstly: Debit what comes in and credit what goes out.
- Secondly: Debit all expenses and credit all incomes and gains.
- Thirdly: Debit the Receiver, Credit the giver.
In general ledger accounts, there are two types of balances. To find out the type of balance a ledger has, one should determine the side of the ledger that has a greater balance. A ledger account that has a debit balance will have a greater debit total compared to that of the credit total.
How do you calculate debit balance and credit balance? ›
Add up the amounts on each side of the account to find the totals. Enter the larger figure as the total for both the debit and credit sides. For the side that does not add up to this total, calculate the figure that makes it add up by deducting the smaller from the larger amount.
What is the formula for debit and credit? ›
The extended accounting equation is as follows: Assets + Expenses = Equity/Capital + Liabilities + Income, A + Ex = E + L + I. In this form, increases to the amount of accounts on the left-hand side of the equation are recorded as debits, and decreases as credits.
What is the equation for debit and credit? ›
Debit simply means left side; credit means right side.
Remember the accounting equation? ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance.
How do you total debits and credits? ›
Balancing a general ledger involves subtracting the total debits from the total credits. All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side. For a general ledger to be balanced, credits and debits must be equal.
What is the trick for remembering debits and credits? ›
Debits are always on the left. Credits are always on the right. Both columns represent positive movements on the account so: Debit will increase an asset.
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What is the formula for the ledger? ›
Assets = Liabilities + Equity
Each transaction entered to both the journal (and later, the general ledger) is organized according to this equation, with debits on the left and credits on the right. For accurate reconciliation, the total debit balances must equal the total credit balances.
How to calculate ledger balance? ›
How to calculate your ledger balance
- Note the opening balance.
- Add all credits.
- Subtract all debits.
A general ledger follows the double-entry book-keeping method to maintain records of financial transactions. The transactions are listed in two columns, with debits on the left side and credits on the right side. The debits represent an increase in assets and the credits represent an increase in liabilities.
How to determine debit or credit in accounting? ›
In traditional double-entry accounting, debits are entered on the left, and credits are entered on the right, like so:
- Asset accounts Debit Increase, Credit Decrease.
- Expense accounts Debit Increase, Credit Decrease.
- Liability accounts Debit Decrease, Credit Increase.
- Equity accounts Debit Decrease, Credit Increase.
An account balance is the total amount of money in a bank account or general ledger account. Accountants or banks usually calculate this by taking the sum of all deposits and subtracting all withdrawals.
How to calculate balance amount? ›
The loan balance formula is B=A(1+r)^n-(p/r)[(1+r)^n -1] where B is the balance amount, A is the loan amount, P is the payment amount, r is the rate of interest (compounded), and n is the number of time periods.
What is the total balance of the general ledger? ›
Balancing a general ledger involves subtracting the total debits from the total credits. All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side. For a general ledger to be balanced, credits and debits must be equal.
How do you calculate closing balance in general ledger? ›
This closing balance formula is, however, pretty straightforward. You simply need to take your opening balance at the start of the accounting period, add any earnings, and subtract what you spent in the period.
